Chapter 2

Question 1

CH2 What is DIRECT MATERIALS?

Answer 1

RAW materials that become an INTEGRAL PART of the product and that can be conveniently TRACED directly to it. EXP: A radio installed in an automobile

Question 2

CH2 What is DIRECT LABOR?

Answer 2

Those LABOR COSTS that can be easily traced to individual UNITS of product. EXP: WAGES paid to automobile assembly workers

Question 3

CH2 What is Manufacturing Overhead?

Answer 3

Question 4

CH1 What is INDIRECT LABOR?

Answer 4

INDIRECT LABOR: WAGES paid to employees who are NOT DIRECTLY INVOLVED in production work. EXP: Maintenance workers, janitors and security guards.

Question 5

CH1 What are INDIRECT MATERIALS?

Answer 5

INDIRECT MATERIALS: Materials used to SUPPORT the production process. EXP: Lubricants and cleaning supplies used in the automobile assembly plant.

Question 6

CH2 What are Manufacturing Costs and how they are classified?

Answer 6

Question 7

CH2 What are Non-manufacturing Costs?

Answer 7

Question 8

CH2 What are Product Costs and Period Costs? Product Costs Versus Period Costs

Answer 8

1/ Product costs = Manufacturing costs = DM + DL + M-OH.

2/ Period Costs = Non-manufacturing costs = Marketing or Selling Cost + Administrative Cost

Question 9

CH2 Can you compare Merchandising and Manufacturing Activities?

Answer 9

Question 10

What are the differences in BLANCE SHEET between merchandisers and manufacturers.

Answer 10

Question 11

CH2 What is Inventory Flows?

Answer 11

Question 12

What are variable costs and fixed costs?

Behavior of Cost (within the relevant range)

Answer 12

Variable costs

• In total: Total variable costs change when activity level changes.
• Per unit: Virable cost per unit remains the same over wide ranges of activity.
• *Fxed costs**
• In total: Total fixed costs remain the same even when activity level changes.
• Per unit: Average fixed cost per unit goes down as activity level goes up.

Question 13

What are Differential Costs and Differential Revenues?

Answer 13

Costs and revenues that differ among alternatives.

Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.

Differential revenue is:
$2,000 – $1,500 = $500

Differential cost is: $300

Question 14

What are sunk costs?

Answer 14

• *Sunk costs** have already been incurred and cannot be
• *changed** now or in the future. They should be ignored when making decisions.

Example: You bought an automobile that cost $10,000
two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.

Question 15

Idle Time

Answer 15

Idle Time may be caused by:

- Machine Breakdowns

- Power Failures

- Material Shortages

The labor costs incurred during idle time are ordinarily treated as manufacturing overhead.

Question 16

Overtime

Answer 16

The overtime premiums for all factory workers are usually considered to be part of manufacturing overhead.